Concentrated Liquidity

Frequently Asked Questions (FAQ) about concentrated liquidity

What is concentrated liquidity?

Concentrated liquidity is liquidity that has a set price range. This allows users to "concentrate" their liquidity into ranges for more capital efficiency and fees. Unlike most liquidity platforms, Gamma focuses on concentrated liquidity.

Why does concentrated liquidity require active management?

Concentrated liquidity requires a liquidity provider to constantly monitor and adjust their liquidity ranges and depths. Active management of liquidity positions is crucial to success.

What are the benefits and risks associated with concentrated liquidity?

By concentrating liquidity into specific ranges, the liquidity provider can earn more fees. Traders experience less slippage on trades in concentrated liquidity markets.

Concentrated liquidity can also amplify the effects of price changes, called impermanent loss. Concentrated liquidity requires users to be extremely vigilant or rely upon a concentrated liquidity manager for providing liquidity.

Are concentrated liquidity pools 50-50?

Rarely. Concentrated liquidity pools vary in their asset ratios. The asset pair can swing from 100-0 to 0-100, sometimes aggressively. Users must understand that before entering Gamma's vaults, they must deposit at the current pair ratio. Users will also withdraw at the current pair ratios.

Has concentrated liquidity management (CLM) been difficult?

Concentrated liquidity management is a pretty tough space to be in. There are serious technical and operational challenges.

Developing comprehensive strategies where fees exceed impermanent loss over various timescales has been a major challenge. These strategies must work in bull markets, bear markets, and stagnation. They also have to work with stable-stable, stable-volatile, and volatile-volatile pairs.

Communicating the success or failure of those strategies through statistics and analytics has also been challenging. There are a variety of ways to define success for a liquidity provider.

Is concentrated liquidity here to stay?

Yes. Uniswap V3 continues to dominate DEX volumes. Other exchanges like QuickSwap V3, Trader Joe, KyberSwap, and even Curve V2 use forms of concentrated liquidity.

What platforms are using concentrated liquidity?

Uniswap V3/V4, Algebra Finance, Balancer V2, and more

Last updated